WSJ Reaction: “Economic Outcomes of a U.S. Carbon Tax”

On July 10, 2015, Jay Timmons, CEO of the National Association of Manufactures (NAM), published a letter to the editor in the Wall Street Journal in response to an opinion piece discussing Senator Chuck Schumer’s (D-NY) support for a carbon tax. In his response, Timmons cited a misleading study on a carbon tax that other organizations such as American for Prosperity and the Heritage Foundation have also referenced on their websites.

The study, “Economic Outcomes of a U.S. Carbon Tax” commissioned by NAM and written by NERA Economic Consulting is flawed in both design and interpretation. It finds that any revenue raised by a carbon tax would be outweighed by the economic cost. This is simply false.

Let’s start with the two different models that NERA used to determine the economic and environmental impacts of a carbon tax. In the first scenario, the model implements the tax beginning back in 2013 and is implemented upstream (so, the tax is collected at the point of the fuel’s extraction and its impacts are felt economy wide), it is levied at $20/metric ton of carbon emission and increases at 4% per year until 2053. The second case follows the same guidelines of the first, until 2018 when they adjust the tax rate to escalate to what it would need to be in order to meet an 80 percent reduction in emissions by 2053. In both cases revenue is recycled by reducing both the Federal deficit and personal income tax rate. The report determines that GDP would be reduced by about $97 billion in 2023 if the $20/ton was implemented. In the case of the 80 percent reduction in emissions, the report found that GDP would be reduced by $1.4 trillion by 2053.

The first of many problems with this report is a fundamental one. The way in which NAM proposes to use their carbon tax revenue has been shown to be uneconomic in other studies. In  the Brookings Institute’s study, “The Potential Role of a Carbon Tax in the U.S. Fiscal Reform,” it was found that if carbon tax revenue was used for reducing the federal deficit there would be lower economic output for the first 40 years. Additionally, the firm NAM hired to create their report justifies recycling revenue in this way assuming that the Federal government’s interest rates would be lowered, leading to cheaper interest payments on the debt. However, not only are interest rates already quite low, but the benefits of a federal deficit reduction would not be felt for a number of years. This is not effective economic policy and there are simply better ways that the money could be used to grow the economy.

NAM’s consulting firm, NERA, apparently feels the same way. In their full report, they state in a footnote, “We make no suggestion that this particular combination is desirable, politically likely, or that it will produce the best overall policy outcomes.” This is a blatant admission that reducing the federal deficit with carbon tax revenue is not the most effective policy for GDP growth and it demonstrates how shaky the foundation that they build their findings on actually is.

In a 2014 Washington Post article titled, ”Anatomy of Campaign ad: Find a study from a friendly source,” reporter Sean Sullivan cites NAM’s report as a dubious study designed to be used in campaign ads. Sullivan points out direct connections between funding NAM receives and ties to those who paid for the attack ads. These economic estimates are based on assumptions that are false. Further investigation into the model NERA used shows that they assumed that the tax would not cause a change in households’ purchasing decisions and Americans would maintain dependence on fossil fuels. Seriously? Similarly, NERA assumes that federal spending and deficit levels would continue to grow at the same pace they have in the past and neglects to take into account any increases in investment or jobs a carbon tax would create.

NAM’s interpretation of the NERA report regularly states that a carbon tax would have a negative net effect on consumption, investments, and jobs. A ‘real world’ example from British Columbia, Canada proves these claims to be untrue. BC uses the revenue from their carbon tax in a way that we would recommend: their $30 fee on carbon lowers corporate and personal income tax rates and has consistently grown their economy. Since 2008 British Columbia’s GDP has actually risen by 1.5%, as compared to the rest of Canada which has only risen 1.28%. Consumption per person of fuels has dropped by 17.4 percent and they currently have the lowest provincial income tax rate in all of Canada.

In his book, “Double Dividend”, published last year, Harvard Professor Dale Jorgenson points out that recycling the revenues from carbon taxes into reducing taxes on business and capital investment produces a net increase in the rate of GDP growth of 25%.

Sadly, NAM neglects to realize the very positive impact a revenue–neutral carbon fee could have on American manufacturing. Coupled with a border adjustment tariff and rebate program to incentivize a global carbon pricing protocol, a U.S. domestic carbon fee would quickly be matched by all our major trading partners, who would rather collect such revenue themselves than have their exporters pay us at our border. With global adoption, the U.S manufacturing base emerges even stronger, as we have access to the least expensive, lowest carbon resources available anywhere.  The U.S. is already becoming a leader in manufacturing energy intensive products, thanks to our abundant energy resources. With a global, uniform price on carbon, our competitive advantage in manufacturing is enhanced.

NAM’s report is misleading at best — at worst, it is a political tool they use to turn attention away from the positive merits that a carbon fee could bring the country. Our prescription for recycling revenue, lowering the corporate tax rate and helping low income consumers stay whole on energy costs, grows the economy, creates jobs, and increases GDP. With that increase in economic power, some deficit reduction could be possible, if NAM still wants it.